Russia needs to invest more to improve growth prospects

In Russia a slight growth recovery – up to 2.5% – is expected for 2014. Addressing fundamental weaknesses could pave way for further growth.However the demand for Russian gas is being depressed as buyers seek alternatives.

A modicum of recovery after a subdued 2013

After bouncing back from the global credit crunch in 2010 and 2011, Russia saw its economic growth slide down to a 'mere' 1.5 per cent in 2013: an all-time low since the start of the financial crisis. ABN AMRO expects growth to pick up to 2.5 per cent in 2014, supported by the global recovery and reviving investment, and with the low comparison base and some positive effects from the Sochi 2014 Olympics having key parts to play. ABN AMRO sees growth accelerating to 3 per cent in 2015.

Invest more, grow more

Russia will need to address a number of structural weaknesses and modernise its economy if it’s to improve its growth prospects, or so ABN AMRO reckons. Although the country is unlikely to achieve the growth figures it clocked up before the financial crisis, it could build future growth by increasing investment – domestic and foreign – to enhance the investment and business climate and bolster competitiveness. Also, the country could do worse than encouraging diversification and innovation, and developing its energy sector. ABN AMRO does not foresee any spectacular reforms without changes in the political arena.

More flexible pricing key to retaining market share

A major oil and gas producer, Russia is looking at higher costs now that easy resources are drying up, and the country will have to invest to get to less accessible resources. In addition, its infrastructure is suffering from a lack of competition, and ABN AMRO believes its big challenge will be to secure energy demand from Europe. Meanwhile, investment in resources and infrastructure will be needed to serve new customers, particularly in Asia, while buyers of Russian gas are clamouring for a further de-coupling of gas and oil prices. With global gas prices a lot lower – in the United States in particular – demand for Russian gas might get squeezed, as buyers start looking for alternatives. To keep its share of the market and exports at their current levels, the country will have to move to more flexible pricing.

Documents

Share

Blogger

Hans van Cleef

Senior Sector Economist Energy

Hans van Cleef is a Sector Economist at ABN AMRO, responsible for the Energy sector within ABN AMRO’s Group Economics. Han follows the energy market in the broadest sense (not only the oil and gas markets, but other energy sources as well, such as wind and solar energy and the CO2 market). Hans regularly reports on the energy market in various publications, presentations and interviews. He worked as a treasury advisor at ABN AMRO Private Banking Netherlands from 2002 to 2007, then devoted himself entirely to research at ABN AMRO Private Banking International as a currency and commodities/energy analyst. Hans has been a Sector Economist – Energy since early 2012.